Real estate value: creation and destruction

Published date01 November 2006
Date01 November 2006
AuthorStephen Roulac,Alastair Adair,Stanley McGreal,Jim Berry,Suzanne Allen
Subject MatterProperty management & built environment
Real estate value: creation and
Stephen Roulac
Roulac Global Places, San Rafael, California, USA and University of Ulster,
Newtownabbey, UK, and
Alastair Adair, Stanley McGreal, Jim Berry and Suzanne Allen
School of the Built Environment, University of Ulster, Newtownabbey, UK
Purpose – A central consideration in real estate is the analysis of those factors that impact upon
value, in particular how value is created in real estate development and investment deals. The
converse of understanding how real estate value may be destroyed is equally important. The paper
seeks to argue that a better understanding of these processes would allow more informed and
successful decisions to be made in structuring investments and evaluating performance.
Design/methodology/approach – An innovative web-based survey tool was employed. The paper
analyses expert opinion based on a sample of 97 real estate professionals from North America and
Europe. Those issues that can impact on the creation and destruction of value in real estate
development and investment projects and their relative magnitude of impact are assessed.
Findings – There is no apparent distinction between those factors that create value and those that
destroy value, though there are variations in the magnitude of impact. Idea/concept is the major
influence for development projects and is even more pronounced for real estate investment.
Perception/recognition of the opportunity is a key driver of value.
Research limitations/implications – Limitations arise from the response rate which allows an
upper tier of analysis across the entire data set but is not of sufficient size to disaggregate either by
respondent professional group or by geographical region.
Originality/value – Although the objective of real estate development, investment and deal making
is value creation, there is, paradoxically, little literature about creating value. This paper is the first
study to elicit opinion internationally on the subject and to quantify the relative contribution of a range
of factors concerning value creation and destruction in a real estate project.
Keywords Real estate, Designand development, Investments
Paper type Research paper
1. Introduction
Although it is broadly accepted that the objective of real estate development,
investment and deal making is value creation (Roulac, 1997), there is paradoxically
little literature about creating value. More particularly, the relative contributions of
different strategies, managerial tasks and functions to creating value in real estate
development, investment and deal making have not been explicitly identified, analysed
and measured. While Roulac (2000) implemented a comprehensive study of the
importance of different factors in the investing decision, the relative contributions that
The current issue and full text archive of this journal is available at
Winner of the Emerald Gerald Brown Memorial Prize for the Best Paper Presented in the Area of
Real Estate Investment.
Received September 2005
Accepted January 2006
Journal of Property Investment &
Vol. 24 No. 6, 2006
pp. 474-489
qEmerald Group Publishing Limited
DOI 10.1108/14635780610708293
these factors make to ultimate value creation in a real estate project has heretofore not
been quantified.
Although some illuminating research has been directed to partitioning the
components of the rate of return of real estate investment into cash flow, tax shelter
and appreciation components, how the particular tasks of real estate investing and deal
making activity contribute to realizing those returns has not been explicitly addressed.
Comprehensive surveys of the literature on land economics (Roulac et al., 2005),
appraisal research contributions to the ARES, ERES, PPRES and RICS conferences
(Roulac et al., 2004) did not uncover a literature of consequence, concerning how value
is actually created and/or destroyed in real estate development and investment
ventures. Earlier work on bibliography listing of some 3,794 entries concerning real
estate valuation and related topics by Nurcombe (1987) indicated no research that
addresses the subject of value creation or destruction.
A survey of the contents of real estate textbooks in the United States found that
coverage of development topics collectively accounted for only 3.4 per cent of the total
(Roulac, 1994). Although these textbooks deal with value concepts, neither collectively
nor individually do they consider the relative contributions of different tasks and
actions by real estate players and protagonists in actually creating or destroying value.
Such treatment as was directed to these topics was oblique, minimal, and largely
descriptive, rather than being specific, explicit and analytical. A more recent survey of
the real estate textbooks by Roulac and Distad (2004) confirms that the earlier
minimalist-nominalist treatment of the sources of value creation/destruction has not
changed in American real estate textbooks over the last decade.
This paper seeks to address this gap in the real estate knowledge base by the
presentation of empirical evidence on the theme of real estate value. Using a web
survey with respondents drawn from both the US and the UK/Europe the paper
analyses expert opinion concerning those issues that can impact on the creation and
destruction of value in real estate development and investment projects and assesses
the relative magnitude of their impact. The paper is structured as follows. Section two
provides a review of literature on real estate value. Section three conceptualises the
research problem and section four provides detail on the methodology underpinning
the empirical investigation. Results are presented in section five dealing with
fundamental propositions, section six considers real estate development and section
seven examines real estate investment. Conclusions are drawn in section eight.
2. Nature of real estate value
Real estate is a significant investment asset class, a major contributor to economic
worth and forms a significant and growing part of cross border direct investme nt.
Hence, it is in the interest of national governments, the valuation profession and the
public that the pricing of real estate is carried out reliably, consistently and
transparently. Indeed, lack of knowledge of value may represent a barrier to entering
investment markets and ultimately the free flow of capital. Consequently real estate
value may be impaired rather than enhanced (Downie, 1995).
From an economic perspective value is defined as the price that will be paid for the
highest and best use of real estate which, in an unfettered market, is determined by the
forces of demand and supply. However under normal market conditions the price paid
for real property in a fettered market will be influenced either positively or negatively
Real estate value

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